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Who's Keeping the Aussie Aloft?

Maisant Ludovic | Hemis.fr | Getty Images

The Australian dollar has a lot going for it: a top tier credit rating, more than respectable yield for a triple-A country, and a resource-based economy with big ties to China.

What it doesn't have is a central bank propping it up. Business conditions in Australia deteriorated to financial-crisis levels, thanks partly to the strong Aussie dollar, and the Reserve Bank of Australia increased reduced its relative holdings of Australian dollars in October after net selling in September and August, says Todd Elmer, head of G10 currency strategy for Asia ex-Japan at Citigroup.

The central bank's action "should feed some further speculation that the RBA is engaged in 'direct placement' of AUD with foreign central banks and that it may be attempting to weaken the currency," Elmer wrote in a note to clients.

But if you're thinking of riding those central bank coattails, think again, Elmer says: "Markets would be misplaced to sell AUD on this factor, since it simply signals that demand for AUD from the rest of the world remains in place." Elmer uses IMF data to estimate that selling by the Reserve Bank of Australia totaled roughly $1.4 billion in the three months through October, while trend purchases by foreign central banks appear to run between $5 billion and $10 billion.

"Pressure on AUD to appreciate is much more a function of foreign appetite, which is driven by factors that are largely independent of RBA FX policy," Elmer says.

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MULTI CURRENCIES v The Dollar

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